Franchising is a business model in which one business (the franchisor) allows a separately owned business (the franchisee) to use their systems, brand name and other intellectual property rights in return for royalty and other considerations. The advantage for a franchisee is that they get the benefit of a proven and tested business model. According to a recent study around 80% of franchised businesses still operate after five years compared with only 20% of independently started businesses. The franchisor, on the other hand, is able to expand their business without providing the capital and taking on the risk. The association between the parties is symbiotic. The franchisee relies on the franchisor and the other franchises to maintain the reputation of the brand.
The document that gives rise to the relationship is the franchise agreement which sets out the conditions upon which the franchise is to operate. The franchise agreement sets out the:
- Fees to be paid, both upfront and on-going
- Duration of the agreement and renewal rights
- Intended territory or market
- Dispute resolution procedure; and
- Rules relating to the on-sale of the franchise.
LAWS GOVERNING FRANCHISING IN INDIA
In the absence of a specific law solely meant for regulating the business of franchising in India franchisors are governed by a number of statutes and rules rather than a single comprehensive enactment. Primarily, a franchise agreement is a contract between the franchisor and the franchisee. The first law which comes into the picture is the Contract Act, 1872 which governs contracts in India. A franchise agreement will be governed by the Indian Contract Act, 1872, and the Specific Relief Act, 1963, which provide for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract. Laws relating to intellectual property, (includes Copyright, Trademark Act, Patent, etc) taxation, sale of goods, property laws, insurance law and labour laws also apply to franchise transactions. Additionally, laws applying to specific sectors of goods and services will also apply depending on the franchise.
A GENERAL PARTNERSHIP BETWEEN PARTIES
In order to assist the franchisee and to ensure consistent quality of service amongst franchises there is usually a franchise manual that provides operational details. Fundamentally, franchise agreements should be approached like any other contract and need to clearly reflect the arrangement between the parties. Clauses that are unnecessary to the functioning of the relationship need to be carefully examined by an independent lawyer with specialist franchise expertise. Many franchise agreements, particularly with large firms, are non-negotiable. Prospective franchisees should be prepared to decline to sign contracts that contain onerous and one-sided terms. There are a number of common pitfalls within franchise agreements. For example, the franchisee needs an exclusive territory within which the franchisor may not grant any other franchise licenses. Clauses that allow reduction of this territory by the franchisor are common and should be considered carefully. Also, the franchisor should specify the steps they will take to protect the intellectual property rights being paid for.
The exact method of calculating the royalties needs to be specified as well as penalties for late payments. Clauses that allow for early termination are very common and need to be clearly understood. Agreements that limit the liability of the franchisor to the franchisee are cause for concern, particularly when relating to obligations for marketing, training, and disclosure statements in the negotiation phase.
FRANCHISING IN INDIA
India’s vast geographical spreads, diversity, growing economy, purchase power, a young population and acceptance of Western concepts are huge enablers for franchising. For the last several years, franchising is growing in India at a steady rate of 25-30%. In our opinion a special franchise law would greatly accelerate dispute resolutions and fortify the Indian retail industry.